How Inventory Cost Influences Introduction Timing of Product Line Extensions

In the industry with radical technology push or rapidly changing customer preference, it is firms' common wisdom to introduce high‐end product first, and follow by low‐end product‐line extensions. A key decision in this “down‐market stretch” strategy is the introduction time. High inventory cost is pervasive in such industries, but its impact has long been ignored during the presale planning stage. This study takes a first step toward filling this gap. We propose an integrated inventory (supply) and diffusion (demand) framework and analyze how inventory cost influences the introduction timing of product‐line extensions, considering substitution effect among successive generations. We show that under low inventory cost or frequent replenishment ordering policy, the optimal introduction time indeed follows the well‐known “now or never” rule. However, sequential introduction becomes optimal as the inventory holding gets more substantial or the product life cycle gets shorter. The optimal introduction timing can increase or decrease with the inventory cost depending on the marketplace setting, requiring a careful analysis.     

Competing on Time: An Integrated Framework to Optimize Dynamic Time‐to‐Market and Production Decisions

This study develops a comprehensive framework to optimize new product introduction timing and subsequent production decisions faced by a component supplier. Prior to market entry, the supplier performs process design activities, which improve manufacturing yield and the chances of getting qualified for the customer's product. However, a long delay in market entry allows competitors to enter the market and pass the customer's qualification process before the supplier, reducing the supplier's share of the customer's business. After entering the market and if qualified, the supplier also needs to decide how much to produce for a finite planning horizon by considering several factors such as manufacturing yield and stochastic demand, both of which depend on the earlier time‐to‐market decision. To capture this dependency, we develop a sequential, nested, two‐stage decision framework to optimize the time‐to‐market and production decisions in relation to each other. We show that the supplier's optimal market entry and qualification timing decision need to be revised in real time based on the number of qualified competitors at the time of market‐entry decision. We establish the optimality of a threshold policy. Following this policy, at the beginning of each decision epoch, the supplier should optimally stop preparing for qualification and decide whether to enter the market if her order among qualified competitors exceeds a predetermined threshold. We also prove that the supplier's optimal production policy is a state‐dependent, base‐stock policy, which depends on the time‐to‐market and qualification decisions. The proposed framework also enables a firm to quantify how market conditions (such as price and competitor entry behavior) and operating conditions (such as the rate of learning and inventory/production‐related costs) affect time‐to‐market strategy and post‐entry production decisions.     

Advance Selling in the Presence of Speculators and Forward‐Looking Consumers

This article examines the pricing policy of a monopolist seller who may sell in advance of consumption in a market that comprises of myopic consumers, forward‐looking consumers, and speculators. The latter group has no consumption value for the goods and is in the market with the sole objective of making a profit by reselling the purchased goods shortly after. Consumers, although homogeneous in terms of their valuations, are different with respect to their perspectives. We show that in an “upward” market where the expected valuation increases over time, the optimal pricing policy is an ex ante “static” one where the seller “prices into the future” and prices the myopic consumers out of the advance market. However, in a “downward” market where the expected valuation decreases over time, the seller adopts a dynamic pricing strategy except for the case when higher initial sales can trigger more demand subsequently and when the downward trend is not too high. In this case, the seller prefers an ex ante “static” pricing strategy and deliberately prices lower initially to sell to speculators. We identify the conditions under which the seller benefits from the existence of speculators in the market. Moreover, although the presence of entry costs is ineffective as an entry deterrence, we determine the conditions under which exit costs can rein in speculative purchase.     

Browse‐and‐Switch: Retail‐Online Competition under Value Uncertainty

Although online shopping is becoming popular, consumers who are unsure about whether to buy a product may find it advantageous to visit a brick‐and‐mortar retail store to first examine the product before purchasing it. But, after browsing at the store, consumers have the option of switching to an e‐tailer to purchase the item at a cheaper price rather than buying at the store. Recent business press refers to this browse‐and‐switch behavior as “showrooming,” and attributes to it the declining profits of brick‐and‐mortar retailers. To study the effect of the browse‐and‐switch option on retail and online pricing strategies and profits, we analyze a stylized economic model that incorporates uncertainty in consumers' valuation of the product, captures the heterogeneity among consumers in their inclination to purchase online, and permits product returns. We consider various equilibrium scenarios for different combinations of consumer shopping behaviors, characterize the parameter ranges for each scenario, and demonstrate that browse‐and‐switch behavior can indeed occur under equilibrium. Our analysis further shows that the option for consumers to browse‐and‐switch intensifies competition, reducing the profits for both firms.     

Technical Note – Pricing Below Cost Under Exchange‐Rate Risk

Pricing below cost is often classified as “dumping” in international trade and as “predatory pricing” in local markets. It is legally prohibited from practice because of earlier findings that it leads to predatory behavior by either eliminating competition or stealing market share. This study shows that a stochastic exchange rate can create incentives for a profit‐minded monopoly firm to set price below marginal cost. Our result departs from earlier findings because the optimal pricing decision is based on a rational behavior that does not exhibit any malicious intent against the competition to be considered as violating anti‐trust laws. The finding is a robust result, because our analysis demonstrates that this behavior occurs under various settings such as when the firm (i) is risk‐averse, (ii) can postpone prices until after exchange rates are realized, (iii) is capable of manufacturing in multiple countries, and (iv) operates under demand uncertainty in addition to the random exchange rate.     

Decision Making in Cross‐Functional Teams: The Role of Decision Power*

Through a series of game‐theoretical models, this study systematically examines decision making in cross‐functional teams. It provides a framework for the design of an organization‐specific decision‐making process and for the alignment of a team's microdecision with the “optimal” decision that maximizes the firm's payoff. This study finds that even without changing the team leader, firms could change and even dictate the team's microdecision outcome via adjusting the team member's seniority, empowering team members with veto power or involving a supervisor as a threat to overrule the team decision. This finding implies that to reposition products in the marketplace, structuring cross‐functional teams’ microdecision‐making processes is essential.     

All‐Pay Contests

This paper studies a class of games, “all‐pay contests,” which capture general asymmetries and sunk investments inherent in scenarios such as lobbying, competition for market power, labor‐market tournaments, and R&D races. Players compete for one of several identical prizes by choosing a score. Conditional on winning or losing, it is weakly better to do so with a lower score. This formulation allows for differing production technologies, costs of capital, prior investments, attitudes toward risk, and conditional and unconditional investments, among others. I provide a closed‐form formula for players' equilibrium payoffs and analyze player participation. A special case of contests is multiprize, complete‐information all‐pay auctions.     

Newsvendor Pricing Problem in a Two‐Sided Market

We study the pricing problem of a “platform” intermediary to jointly determine the selling price of the platforms (hardware) sold to consumers and the royalty charged to content developers for content (software), when the demands for content and for platforms are interdependent. Our model elucidates the impact of supply chain replenishment costs and demand uncertainty on the strategic issues of platform pricing in a two‐sided market.     

The Impact of Product Lifecycle on Capacity Planning of Closed‐Loop Supply Chains with Remanufacturing

Product recovery operations in reverse supply chains face rapidly changing demand due to the increasing number of product offerings with reduced lifecycles. Therefore, capacity planning becomes a strategic issue of major importance for the profitability of closed‐loop supply chains. This work studies a closed‐loop supply chain with remanufacturing and presents dynamic capacity planning policies developed through the methodology of System Dynamics. The key issue of the paper is how the lifecycles and return patterns of various products affect the optimal policies regarding expansion and contraction of collection and remanufacturing capacities. The model can be used to identify effective policies, to conduct various “what‐if” analyses, and to answer questions about the long‐term profitability of reverse supply chains with remanufacturing. The results of numerical examples with quite different lifecycle and return patterns show how the optimal collection expansion/contraction and remanufacturing contraction policies depend on the lifecycle type and the average usage time of the product, while the remanufacturing capacity expansion policy is not significantly affected by these factors. The results also show that the collection and remanufacturing capacity policies are insensitive to the total product demand. The insensitivity of the optimal policies to total demand is a particularly appealing feature of the proposed model, given the difficulty in obtaining accurate demand forecasts.     

Optimal Sequencing of Unpunctual Patients in High‐Service‐Level Clinics

Even though patients often arrive early and out of turn for scheduled appointments in outpatient clinics, no research has been undertaken to establish whether an available provider should see an early patient right away (preempt) or wait for the patient scheduled next. This problem, which we call the “Wait‐Preempt Dilemma,” is particularly relevant for “high‐service‐level” clinics (such as psychotherapy, chiropractic, acupuncture), where preempting may cause the missing patient to wait for an excessively long time, should she show up soon. Typically, the dilemma is resolved by preemption, where the provider starts serving the patient who has already arrived to avoid staying idle. By contrast, we analytically determine the time intervals where it is optimal to preempt and those where it is optimal to wait, and find that in some cases the provider should in fact stay idle, even in the presence of waiting patients. Our results suggest that the proposed analytical method outperforms the always‐preempt policy in clinics that do not overbook and have service times longer than 30 minutes. In these cases, the analytical method dramatically reduces patient waiting times at the cost of a modest increase in overtime. By contrast, in clinics that overbook or have short service times, the two policies perform similarly, and hence the always‐preempt policy is preferable due to its simplicity. A software application is provided that clinics can readily use to solve the wait‐preempt dilemma.     

Controversial Role of GPOs in Healthcare‐Product Supply Chains

This paper examines the controversial role that Group Purchasing Organizations (GPOs) play in the supply chains for healthcare products. Among the controversies, perhaps the most fundamental one is whether or not GPOs reduce purchasing costs for their members. However, the fiercest controversy is around the “contract administration fees (CAFs)” that GPOs charge to manufacturers. We examine these and other controversies using a Hotelling duopoly model. Among our conclusions: GPOs increase competition between manufacturers and lower prices for healthcare providers. However, GPOs reduce manufacturers' incentives to introduce innovations to existing products. We also demonstrate that the existence of lower off‐contract prices is not, per se, evidence of anticompetitive behavior on the part of GPOs. Indeed, we demonstrate that, under certain circumstances, the presence of a GPO lowers off‐contract prices. We also examine the consequences of eliminating the “safe harbor” provisions that permit healthcare GPOs to charge CAFs to manufacturers, and conclude that it would not affect any party's profits or costs.     

Optimal Pricing of Two Successive‐Generation Products with Trade‐in Options under Uncertainty

To entice consumers to purchase both current and next generation products, many manufacturers and retailers offer trade‐in programs that allow buyers of the first generation product to trade‐in the product and purchase the new generation product at a lower price. By considering the interactions between “forward‐looking” consumers and a firm when a trade‐in program is offered, we analyze a two‐period dynamic game to determine the optimal prices of two successive‐generation products in equilibrium, and examine the conditions under which trade‐in programs are beneficial to the firm. Our model incorporates market heterogeneity (valuation of the first generation product varies among the consumer population), product uncertainty (the incremental value of the new product is uncertain before its introduction), and consumers' forward‐looking behavior (consumers take future product valuation and prices into consideration when making purchasing decisions). With the trade‐in option, we show that consumers are willing to pay a price that is higher than their valuations of the current product. Furthermore, trade‐in programs are more beneficial to the firm when: (i) the durability of the current product is high; (ii) the market heterogeneity is low; or (iii) the uncertainty level (or the expected incremental value) of the new product is high. Finally, when the incremental value of the new product is more uncertain, consumers are more willing to purchase the current product because of the “option” value of the trade‐in programs and thus trade‐in programs can be more beneficial to the firm in this case.     

Product Positioning in a Two‐Dimensional Market Space

This paper examines the optimal product portfolio positioning for a monopolist firm in a market where consumers exhibit vertical differentiation for product performance and horizontal differentiation for product feature. Our key results are as follows: (i) Variable costs drive vertical differentiation. In the presence of significant volume‐dependent manufacturing costs, the optimal portfolio contains a mix of vertically and horizontally differentiated products and an increase in the variable cost makes adding vertically differentiated products relatively more profitable; if fixed volume‐independent design costs dominate, the portfolio exhibits solely horizontal differentiation. (ii) Horizontal differentiation is the main profit lever, and vertical differentiation brings only a marginal benefit; this is true even when most of the consumers exhibit low willingness to pay for performance, which is often used as an excuse to offer low‐end products. (iii) There are more low‐quality products than high‐quality ones, and market coverage increases when the willingness to pay for performance increases. In summary, the model shows how portfolio composition decisions depend on the product cost structure and the consumer preferences.     

Beyond Make‐Buy: Internalization and Integration of Design and Production

Much recent attention in industrial practice has been centered on the question of which activities a manufacturing firm should complete for itself and for which it should rely on outside suppliers. This issue, generally labeled the “make‐buy” decision, has received substantial theoretical and empirical attention. In this paper, we broaden the scope of the make‐buy decision to include product design decisions, as well as production decisions. First, we examine independently the decisions of whether to internalize design and production, and then we consider how design and production organizational decisions are interdependent. The specific research questions we address are: (1) How can design and production sourcing decisions be described in richer terms than “make” and “buy”? (2) Do existing theories of vertical integration apply to product design activities as well as production decisions? (3) What is the relationship between the organization of design and the organization of production? (4) What organizational forms for design and production are seen in practice? After developing theoretical arguments and a conceptual framework, we explore these ideas empirically through an analysis of design and production sourcing decisions for bicycle frames in the U. S. mountain bicycle industry.     

Self‐Service Operations at Retail Stores: The Role of Inter‐Customer Interactions

Inter‐customer interactions are important to the operation of self‐services in retail settings. More specifically, when self‐service terminals are used as part of customers’ checkout processes in retail operations without the explicit involvement of retailers as the direct service providers, inter‐customer interactions become a significant managerial issue. In this article, we examine the impact of inter‐customer interactions at retail self‐service terminals on customers’ service quality perceptions and repeat purchase intentions at retail stores. We conduct a scenario‐based experimental design (N = 674) using a 2 × 2 factorial design in which inter‐customer interactions are divided into “positive” vs. “negative” and occur during the “waiting” or during the actual “transaction” stages of self‐services at a retail store. We use attribution theory to develop the hypotheses. The results demonstrate that, through their interactions, fellow customers can exert influences on a focal customer's quality perceptions and repeat purchasing intentions toward a retail store. Furthermore, these influences were impacted by how customers attribute blame or assign responsibility toward the retail store. Service operations managers should leverage these interactions by designing into self‐service settings the capacities and interfaces that are best suited for customers’ co‐production of their self‐service experiences.     

Training,Production, and Channel Separation in ITC's E‐Choupal Network

In recent years, I.T.C. Limited (hereafter ITC) developed the “e‐Choupals” for the rural areas of India. In this new business model, ITC reaches implicit agreements with some farmers (inside the network) that they can sell the products directly to ITC at the market price in the local market, but allow the farmers, both inside and outside the network, to access valuable information through the e‐Choupals. In this study, we investigate ITC's incentive of offering such opportunities, especially to those farmers outside the network, and analyze the farmers’ strategic quantity decisions. We show that the implicit agreement behaves as a formal contract, regardless of the price elasticity of the local market: Once reaching an agreement with ITC, the farmers always give priority to delivering directly to ITC. The e‐Choupal network leads naturally to the complete separation of selling channels, provided that ITC's capacity constraint is not tight. Surprisingly, in a variety of scenarios, ITC finds it optimal to provide the best available training to the farmers outside the network. We further show that our results are not prone to potential cheating in the mandi system, the possible exploitation via postponed payments, and the stochastic effects on the market‐clearing price.     

Lot‐sizing Decisions Under Limited‐time Price Reduction*

We consider the optimal lot‐sizing policy for an inventoried item when the vendor offers a limited‐time price reduction. We use the discounted cash flow (DCF) approach in our analysis, thereby eliminating the sources of approximation found in most of the earlier studies that use an average annual cost approach. We first characterize the optimal lot‐sizing policies and their properties, then develop an algorithm for determining the optimal lot sizes. We analytically demonstrate that the lot sizes derived using an average annual cost approach for the different variants of the problem are, in general, larger than the DCF optimum. While DCF analysis is more rigorous and yields precise lot sizes, we recognize that the associated mathematical models and the solution procedure are rather complex. Since simple and easy‐to‐understand policies have a strong practical appeal to decision makers, we propose a DCF version of a simple and easy‐to‐implement heuristic called the “Early Purchase” (EP) strategy and discuss its performance. We supplement our analytical developments with a detailed computational analysis and discuss the implications of our findings for decision making.     

Static and Dynamic Pricing of Excess Capacity in a Make‐to‐Order Environment

We consider a make‐to‐order manufacturer that serves two customer classes: core customers who pay a fixed negotiated price, and “fill‐in” customers who make submittal decisions based on the current price set by the firm. Using a Markovian queueing model, we determine how much the firm can gain by explicitly accounting for the status of its production facility in making pricing decisions. Specifically, we examine three pricing policies: (1) static, state‐independent pricing, (2) constant pricing up to a cutoff state, and (3) general state‐dependent pricing. We determine properties of each policy, and illustrate numerically the financial gains that the firm can achieve by following each policy as compared with simpler policies. Our main result is that constant pricing up to a cutoff state can dramatically outperform a state‐independent policy, while at the same time achieving most of the increase in revenue achievable from general state‐dependent pricing. Thus, we find that constant pricing up to a cutoff state presents an attractive tradeoff between ease of implementation and revenue gain. When the costs of policy design and implementation are taken into account, this simple heuristic may actually out‐perform general state‐dependent pricing in some settings.     

Optimal Inventory Control with Retail Pre‐Packs

A pre‐pack is a collection of items used in retail distribution. By grouping multiple units of one or more stock keeping units (SKU), distribution and handling costs can be reduced; however, ordering flexibility at the retail outlet is limited. This paper studies an inventory system at a retail level where both pre‐packs and individual items (at additional handling cost) can be ordered. For a single‐SKU, single‐period problem, we show that the optimal policy is to order into a “band” with as few individual units as possible. For the multi‐period problem with modular demand, the band policy is still optimal, and the steady‐state distribution of the target inventory position possesses a semi‐uniform structure, which greatly facilitates the computation of optimal policies and approximations under general demand. For the multi‐SKU case, the optimal policy has a generalized band structure. Our numerical results show that pre‐pack use is beneficial when facing stable and complementary demands, and substantial handling savings at the distribution center. The cost premium of using simple policies, such as strict base‐stock and batch‐ordering (pre‐packs only), can be substantial for medium parameter ranges.